Tag Archives: Anglo Irish

Sovereign debt crisis spreading to first world countries.

I’ve written about the sovereign debt crisis numerous times already. See here, here, here, here, and here. But so far, I’ve only written about those “at-risk” countries such as Portugal, Greece, Spain, and Ireland or individual states such as Illinois. In other words, the sovereign debt crisis has so far been limited to “small” countries or states. Debt defaults among these countries or states certainly would cause problems and a sharp decline in financial markets, but likely wouldn’t break the bank. But if this crisis spreads to larger, more financially important countries, it would obviously have a much larger impact, possibly one similar to the stock market crash of 1929.

Marketwatch reports that the sovereign debt crisis may in fact be spreading to a first world nation:

There’s no ‘B’ in PIIGS, but Belgium could eventually cause headaches of its own for the euro zone if a bitter and protracted political fight prevents the country from hitting its deficit-reduction targets.

Belgium, in northern Europe, has seemed an unlikely candidate for sovereign-debt troublemaker. From a fiscal perspective, the country, whose capital Brussels is the home of the vast EU bureaucracy, has been associated more with the so-called core of the euro zone than the troubled “periphery.”

But an increasingly bitter political divide along linguistic lines has left Belgium without a government since April and is beginning to raise some concerns.

Belgium, which has enjoyed solid growth, appears on track to reduce its budget deficit to 4.8% of gross domestic product this year from 5.6% in 2009, economists said. The nation’s deficit is among the lowest in the euro zone and compares well with other core countries, including Germany at 4.5% of GDP, France at 8% and the Netherlands at 6%.

But if a government isn’t formed soon, the 2011 fiscal target of a reduction to 4.1% could be in jeopardy, said Philippe Ledent, an economist at ING Bank in Brussels. That in turn would make it all the more difficult for Belgium to meet its target of bringing its deficit down to 3% of GDP, the EU limit, in 2012.

In reality, a 4.1%, 4.8%, or 5.6% don’t seem too bad, especially considering the 10.6% deficit here in the US for 2010 and 8.3% deficit expected for 2011.

Belgium’s deficit figures raise few alarms, but government debt stands at around 100% of GDP, which compares more closely with Greece and Italy.

U.S. debt, by comparison, also stands at about 100% of GDP.

The financial markets are starting to notice Belgium’s problem:

Belgium has had no problems selling its government bonds. Borrowing costs have risen, however, with the yield premium demanded by investors to hold 10-year Belgian debt over benchmark German bunds standing at around 0.8 percentage point, up from around 0.4 percentage point around the same time last year.

But borrowing costs are far from problematic, Ledent said. Belgium’s premium remains nowhere near comparable to Spain’s, for example, which is at around 1.6 percentage points, much less Ireland’s at around 4 percentage points.

The cost of insuring Belgian debt against default is up sharply since the April elections, but well off the peak seen in mid-June. The spread on five-year sovereign credit-default swaps was at 119 basis points last Thursday, according to data provider CMA. That means it would cost $119,000 a year to insure $10 million of Belgian government debt against default for five years.

The spread stood at around 60 basis points in mid-April before the latest round of political turmoil and peaked at 149 basis points in late June.

“Up to now, there has been no strong impact [on borrowing costs], but I’m not sure it will continue like that,” Ledent said. “If in two, three, four months we still don’t have any government, financial markets will consider that we won’t reach the [budget] target and then there could be an impact on the spread.”

How long can countries like Belgium or the United States continue to borrow at low interest rates? These are countries with deficits exceeding 4% of GDP, in Belgium’s case, or 8-10%, in the United States, with debts equal to 100% of GDP. Logic tells us that in these countries, either taxes have to rise significantly or government spending has to fall sharply. Neither Belgium nor the U.S. is doing much to reduce their deficits and even less to cut government spending. Both countries, along with all other nations, are hoping for and relying on an economic recovery to lift their finances. What if we enter another recession? What if the recovery is slower than they expect, as it has been so far? All this talk of deficit reduction will be gone and we’ll be looking at even larger deficits and debt levels.

Worse yet, what happens when investors demand higher interest rates? As mentioned above, Belgium is already paying an extra 0.4% interest on its debt. That does not sound like much, but with government debt at 100% of GDP, the deficit increases by 0.4% just from the interest payment. This is an additional cost on government at a time when it needs to reduce its costs. It increases the deficit just as the country is trying to reduce it. Furthermore, this creates a self-fulfilling prophecy: worries of a debt crisis will cause a country’s interest payment to rise and deficit to increase, thus increasing the chances of a crisis.

So I will repeat what I’ve written many times: The sovereign debt crisis is far from over. In fact, it is just beginning.

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Sovereign debt crisis continues. Irish debt rating cut by Fitch.

A follow-up to yesterday’s blog titled “Sovereign debt crisis far from over. Moody’s may downgrade Ireland again.

Fitch Downgrades Ireland’s Rating on Cost of Banking Bailout

Fitch Ratings lowered Ireland’s credit grade to the lowest of any of the major rating companies and said there’s a risk of a further reduction.

Ireland was cut to A+ from AA-, reflecting the “exceptional and greater-than-expected cost” of the nation’s bailout of its banking system, Fitch said in a statement today.

The move comes a day after Moody’s Investors Service said it may cut the country’s rating. Ireland may have to spend as much as 50 billion euros ($69 billion) to repair its financial system, pushing the budget deficit this year to 32 percent of gross domestic product. Fitch said the rating could be lowered again if the economy stagnates and political support for budgetary consolidation weakens.

Ireland has injected about 33 billion euros into banks and building societies, including 22.9 billion euros into Anglo Irish Bank Corp. Anglo Irish may need up to an additional 6.4 billion euros of capital and a further 5 billion euros in the event of unexpected losses. Irish Nationwide Building Society may need a further 2.7 billion euros.

Fitch said the “timing and strength” of the recovery is critical to reducing the budget deficit. While the economy is rebalancing, “ongoing distress” in real-estate markets and uncertainty over the global economic outlook “weigh on growth prospects and fiscal outlook,” it said.

Irish consumer confidence plunged the most in more than four years last month due to the mounting burden of bailing out Anglo Irish and the surge in sovereign borrowing costs.

“Ireland has experienced a great panic,” said Austin Hughes, chief economist at KBC Ireland. There is a “risk that a sense of apocalyptic gloom may trigger a freeze in spending.”

Ireland bails out banks. Deficit 32% this year. Sovereign debt crisis continues.

The debt crisis finally forced Ireland into making a decision. Ireland had to choose whether to let its banks fail or bail them out. Neither choice was pleasant and both would have had severe repercussions. Not surprising, Ireland took the easier way out. Marketwatch reports:

The cost of bailing out nationalized lender Anglo Irish Bank could soar to as much as 34.3 billion euros ($46.6 billion), the country’s central bank said Thursday, as it also unexpectedly told Allied Irish Banks to raise a further €3 billion.

The new figures, along with the money already injected into other banks and a possible further capital increase for Irish Nationwide Building Society, could see the total cost of the industry bailout hit as much as €50 billion.

In a highly-anticipated assessment of the cost of the financial crisis, the Central Bank of Ireland said it expects Anglo Irish to need €29.3 billion in total, but added the figure could rise by another €5 billion under a “stress scenario.”

The bank has already received €22.9 billion of that total after suffering massive losses as the country’s housing market and construction industry collapsed, dragging the whole economy down with it.

Here’s the key section for those watching the debt crisis and the increasing socialism and economic fascism occurring around the world:

The extra cash for the banking system means the deficit in 2010 will soar to around 32% of gross domestic product, compared to a previous estimate of 12%. The government will announce a new four-year budget plan in November to ensure it can meet this commitment.

A 32 percent deficit!!! That has to be some kind of record.

But what choice did Ireland have? It could have let the banks fail, which would have sent the country to economic turmoil. Instead, it chose to socialize the banks’ debts and is risking the creation of a huge moral hazard. Ireland chose to trade short-term chaos for long-term chaos.

In reality, Ireland is hoping for an economic recovery that will lift its economy and help it reduce its deficit and pay off some of the debt. But will that recovery come soon enough? Will it be strong enough? Will the Irish government and Irish banks suddenly develop the fiscal discipline that it has lacked so far?

I don’t blame Ireland for the choice it made. The problem was not the choice it had to make last week, it was the choices it and other governments, including the United States, have made over the previous decades of loose money, free spending, and debt accumulation.

But we must remember, this story is far from over. It has simply shifted from one of a gushing flesh wound to a slow and festering wound that has not yet been repaired. I repeat: The sovereign debt crisis is far from over. In fact, it is just beginning.